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By HaleStewart October 22, 2017 7:30 am
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International Economic Week in Review: Continued Expansionary News

            This week’s news was mostly positive, but there were a few areas of weakness.  The EU is beginning its second straight year of growth while Australia continues its nearly 20-year run of economic expansion.  For the UK, however, concerns are mounting that Brexit will not end well.  While Japan’s economic expansion continues at a solid pace, Canadian news was a bit weaker.

            The EU is now entering its second year positive economic news.  This was highlighted in a speech by Victor Costancio, VP of the ECB:

In the second quarter of 2017, euro area real GDP expanded for the 17th consecutive quarter, growing by 2.3% year-on-year and exceeding our expectations from earlier in the year. Growth is also becoming more broad-based across euro area countries, showing the lowest dispersion since the beginning of the monetary union. The flow of survey data in the third quarter has been encouraging and bodes well for continued growth momentum in the period ahead.

Robust economic activity is also being translated into a substantial amount of job creation. Almost 7 million more people are now employed in the euro area than in mid-2013, which implies that all of the employment losses recorded during the crisis have been offset. The improving labour market combined with increasing household wealth, strong consumer confidence and favourable financing conditions should all support continued robust private consumption. Investment prospects also look promising, which reflects both the need to make up for forgone investment in previous years as well as the highly accommodative financing conditions which have been passed through to lower borrowing costs for euro area firms.

The employment news is especially encouraging; for some time after the end of the Great Recession, EU employment growth was weak, which likely supported the continued strength of the rightwing nationalist movement.  Other news this week confirmed Costancio’s rosy assessment.  The unemployment rate decreased another .1% to 5.5% (SA) while the employment/population ratio ticked higher.  Inflation is stable at 1.5%, which provides the ECB with amply policy maneuvering room (The ECB’s only mandate is price stability).  Trade is also higher, rising 6.8%Y/Y.  The only weakness this week occurred in construction, which was down .2% M/M and continues to be weak overall. 

            The RBA released their latest meeting minutes, which contained the following general assessment of the Australian economy:

Members commenced their discussion by noting that the Australian economy had grown by 0.8 per cent in the June quarter, in line with the Bank’s forecast. Growth in consumption and the contribution from net exports had been higher than in the March quarter, partly reflecting the unwinding of temporary factors. Members noted that the effect of the decline in mining investment had mostly passed and, with resource exports increasing, recently the mining sector had been contributing to overall growth. Growth in public demand and non-mining business investment had picked up and private sector investment intentions for 2017/18, as recorded in the June quarter ABS capital expenditure survey, had been revised higher.

Perhaps the best news was the 10% increase in non-mining investment that has occurred since the beginning of 2016.  The bank expects this trend to continue due to higher profits and stronger business sentiment.  Household consumption continues to be strong despite weak income growth.  This is largely due to increased household debt and a declining savings ratio. Finally, the bank noted that inflation pressures were weak. 

            News from the UK is split.  Brexit negotiations are not going well.  The EU’s position is that monetary terms should be negotiated first while the UK wants to first focus on the new trade conditions between the two parties.  It appears that negotiations are now at an impasse.  Other news is mixed.  Inflation is still running hot, rising .1% in the latest report.  The sterlings post-Brexit decline is still the main reason for this spike.  While the employment picture is still strong (unemployment is 4.3% and the employment/population ratio is near all-time highs), retail sales tumbled .8% M/M in the latest report.  The overall trend, however, remains positive:

            Canadian news was mixed.  Retail sales decreased .3% on broad-based declines.  Moreover, on a chained basis, the chart appears to be rolling over:

 

On the other hand, auto sales – a retail spending category that shows the strength of weakness of consumer’s long-term sentiment – rose 1.%.  Finally, overall CPI is weak; total CPI was 1.6%.  Moreover, it has only been 2% or greater 3 months in the last 24. 

            Finally, Japanese industrial production continues to accelerate at a very strong pace; it rose 2% M/M and 5.3% Y/Y.

            Next week, the Bank of Canada and the ECB will make their latest rate decision.  This is also a “Markit” week, when we’ll get the updated PMI numbers.  We’ll also get the first look at 3Q GDP from the UK.

Hale Stewart is a tax attorney in Houston, Texas and a financial adviser with Thompson Creek Wealth Advisors.  He is also the author of the Lifetime Income Security Solution.

 

 

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